A Look at the Oil Sector And an Application of the Cycle Turn and Trend Indicators
Earlier this week I had intermediate-term sell signals on crude oil. This came in the wake of an intermediate-term sell signal the week before in Unleaded Gasoline. Therefore, I decided to take this opportunity to tell you that we should now begin to see at least a little more relief at the gas pump and to apply my Cycle Turn and Trend Indicators to this sector.
I realize that when technical analysts begin to talk their mumbo jumbo on cycles, the average person begins to nod off to sleep. Well, for about two years now I have been working with my Trend Indicator and my Cycle Turn Indicator. These tools give us a graphical representation of the cycle and provide us with important turn points. These indicators work whether being applied to the stock market, oil, bonds, gold, the dollar or what ever. All we have to do is simply follow the lines. I also apply these indicators on a layered approach. I use the monthly charts for the longer-term work, the weekly chart for the intermediate-term and the daily for the short-term. If the monthly indicators are in agreement with the intermediate and short-term, then all three trends are moving in the same direction. When a short-term degree is moving opposite to the larger degree there is a counter trend move underway.
Let me add here that the great Dow theorists of the past also operated in this three dimensional world as well. In the compilation, The Story of the Averages by Robert Rhea, 1934, he writes: Regardless of the space used here in discussing the various indicators, it is hoped that readers will always remember that the "Primary" movement is entitled to perhaps 70 per cent of their attention; the "Secondary" to 20 per cent; and the "Minor" (Dow's third) movement to a scant 10 per cent. It is wise to learn to think of these three movements as being the Tide (primary), the Wave (secondary), and the Ripple (minor). The Tide (the primary trend) is the irresistible force which cannot be controlled, although its reach may be temporarily shortened by a receding Wave (a secondary reaction), and this Wave may be moving with or against the Tide. The Ripple (Dow's third movement) may be a part of the Tide or the Wave, moving with or against either. The ripple changes its tendency to ebb and flow with great frequency. It has an almost negligible effect on the Wave, and is but a minute factor where the Tide is concerned; nevertheless, an inquisitive individual, lacking other means of observation, might sometimes determine the hour and minute of the high tide by inserting a pencil in the sand at the highest point reached by successive waves and ripples. When successive movements failed to go above the pencil, then he might reasonably assume that the tide had turned. It is upon such empirical tests that Dow's theory is based.
In applying Rhea's analogy, my monthly analysis would equate to the "Tidal" or "Primary" movements. The weekly analysis is the "Wave" or "Secondary" movement and the daily charts represent the "Ripples." In addition, I have developed my Trend and Cycle Turn Indicators to guide me at each of these levels.
If they are both moving up, then the trend or cycle in the underlying index is clearly moving up.
If the Trend Indicator is moving up, but the Cycle Turn Indictor is moving down, then the market is in a counter trend correction. In other words, the higher degree is moving up while the lower degree is moving down.
By the same token, when both indicators are moving down, then the underlying cycle or trend of that degree is clearly down.
If the Trend Indicator is moving down and the Cycle Turn Indicator is moving up, then the higher degree is moving down and a counter trend bounce is at hand.
It's almost as simple as following these lines. I incorporate a few other factors into the equation, but for the purpose of this introduction, I will leave the rules that I use for filtering out. My purpose here is to show you a simple application of the Cycle Turn and Trend Indicators. More rules would just make a simple concept more confusing than it has to be.
To demonstrate this concept I will use the intermediate-term weekly charts, which would correspond to the Secondary movement explained above. In the first chart below I have plotted a weekly chart of crude oil. The indicator in blue is my Cycle Turn Indicator and the one in green is my Trend Indicator. When the Trend Indicator is moving up and is above its trigger line, the intermediate-term trend is bullish and any down turn of the Cycle Turn Indicator is considered a counter-trend move. As an example, the intermediate-term Trend Indicator turned up in late March and crossed above its trigger line the first week of April. Then, in late April the Cycle Turn Indicator turned down. We knew that as long as the Trend Indicator held above its trigger line that the decline being signaled by the Cycle Turn Indicator was a counter-trend move. In June the Trend Indicator turned down but never crossed below its trigger line. Therefore, the intermediate-term up trend remained intact. Once the correction into the June intermediate-term low was made, prices moved to new highs.
This brings us to the present. Earlier this past week both the Trend and the Cycle Turn Indicators turned down. With both of these indicators now moving down we know that the intermediate-term direction for crude oil is bearish.
In the next chart below I have plotted a weekly chart of the Oil Services Index. This index moved into its high in May and the Trend Indicator made a double top in the process. Note that the Trend Indictor turned down right at the May high. This told us then that this index had made an intermediate-term top and that the intermediate-term trend had turned down. The Cycle Turn Indicator turned up a couple of times since May, but again, with the Trend Indicator moving down we knew that these upturns were only marking counter-trend moves. The week of August 11th the Cycle Turn Indicator turned back down putting both of these indicators in the bearish column. As a result, price has indeed weakened this past week just as the indicators suggested.
Next, I plotted a weekly chart of unleaded gasoline. Here the Cycle Turn Indicator turned down in early July. The week of August 11th the Trend Indicator also turned down. That down turn told us that the intermediate-term trend of gasoline had also turned bearish. Since that time we have seen further weakness and now on the nearby contract unleaded gasoline has violated the important support level that occurred with the May low at $1.95.
My reason for picking these charts was twofold. One, I think that most people will be thrilled to know that relief at the pump is on the way on at least the intermediate-term basis. Short-term this sector is very oversold and ripe for a bounce, but until the intermediate-term indicators turn back up the trend at this degree should be down. Two, I thought that this would be a good way to show you how the Trend and Cycle Turn Indicators can be used to guide us in the markets. Understand that I do have other indicators, statistical analysis and filters that I look at. But, these indicators illustrate the basic concept of how we can simplistically look at the market and determine the trend. These indicators are simply applied to the monthly charts to obtain a longer-term perspective and to the daily charts for the shorter-term perspective.
If you are interested in a statistical and technical based source that also utilizes Dow theory and provides turn points for gold, the dollar, bonds and the stock market, using these indicators, then Cycles News & Views may be for you. The August issue is now available and it contains all of the statistical probabilities and expectations for the stock market for the rest of 2006. A subscription also includes short-term updates three nights a week. Please see www.cyclesman.com/testimonials.htm.